I'm sure Aer Lingus would love to merge with someone. It's the airline's only hope of survival. It's burning cash at an alarming rate and will run out before the end of 2009.
However, it is not a "normal" struggling company. Its share register is not dominated by professional money managers (pension funds, investment managers etc). Instead two shareholders between them own 55% of the company. Ryanair has 30%, and the Irish governement 25%. Add to that the third largest shareholder is, I think, IALPA which bought more shares for the pilots' pension fund when Ryanair made its first takeover bid. We can be fairly sure that Ryanair won't be handing over its 30% stake to anyone that it feels represents competition.
That brings us on to who might buy Aer Lingus. I'm not aware of any legacy airline awash with cash right now. BA, for instance, may or may not be a great fit as per Muellerlight. It certainly couldn't buy Aer Lingus for cash. Therefore any legacy airline merger will almost certainly be a 100% or mostly share deal. In other words, any purchaser would have Ryanair as a significant shareholder. Aer Lingus' other big shareholder, the Irish State, wants cash though. It is desperate for cash. Ireland's credit rating has already been cut twice this year because of its fiscal position. Tax revenues are down 30%. Expenditure is up. Also, having the Irish State as a major shareholder would have all kinds of issues with EU competition law for the acquiring airline. Overall, I can't see the attraction of a share offer for Aer Lingus for either main shareholder.
Who could pay cash for Aer Lingus? Well Ryanair still could if it wanted to. Alternatively, a private equity firm or consortium could do so. They are, apparently, awash with cash and looking for deals. Their aim would be to change working practices ruthlessly, up operating margins, then sell the airline once the economy/industry had recovered. Or they might just break up the company. Economically, Aer Lingus would have been better off sold to Ryanair when the first bid was received. Unfortunately Irish politics got in the way. I suspect the government here now regrets that enormously. O'Learly offered them €1 billion for their 25% stake. They'll be lucky to get €250 million now.